Just another WordPress.com weblog

It has been a long time, a really long time. This May, after so many years of either sitting on the sidelines or occasional rangebound trading, I felt like the bull I was during the time of my blooding into the stock market. It was a moment when I reviewed my entire portfolio and felt that in spite of the recent gains there was only one way, up. After years I feel hope; and the market echoes my sentiment.

The reason I am so bullish on the new government is that unlike the previous one which took no decisions, this one is almost sure to be decisive. The previous government either took no decisions or took terrible ones with major scams unearthed quarter after quarter. The sense of relief on its departure itself is so great that I can’t see a resumption of the bear market under any condition. As I expect the government to do positive work with focus on the essential old economy sectors, I feel that we are going to have a secular multi-year bull run. Retail investors should make use of the first dip they get. They are unlikely to get many.

Current market conditions

The Sensex has been rallying for some time. The Sensex has been rallying since Autumn 2013 but as its composition is heavily skewed and is not really a good indication of the market as a whole, I viewed the rise of the Sensex with cynicism. Only now, in May with the sectoral laggards in large cap, midcap and small cap indices finally moving decisively, we can say that we are in a secular bull market. In the past few trading sessions, we have finally seen midcaps and small caps tying with large caps on percentage gains. The market is green across the board. Selling on news happened only to a limited extent on result day with the Sensex paring down gains as the day went on. We are no longer seeing buying on news. We are seeing buying on expectations.

S&P BSE midcap finally catches up

As is clear from the chart, the Sensex (green line) has considerably outperformed the BSE midcap and it is only in May that the midcaps have begun to outperform.

Around 10th of May, when I was wondering whether to book profits before the elections, a look at non IT, pharma, FMCG,auto and financial part of the portfolio clearly demonstrated that the profits existed only in those sectors that I just excluded. Elsewhere, multi-year losses were only being partially recuperated. The stocks in manufacturing, energy, infrastructure, engineering, metals were finally looking alive but they did not seem like star athletes. That has now changed with the rise of these stocks being meteoric in the last few sessions.

A Pause?

However, the market’s movement in the afternoon today (26th May) suggests a pause or partial rollback of the action. The Sensex ended flat but in the green but prominent midcap indices were all down. This is more significant considering the fact that these indices were significantly up in the morning. Many stocks reversed 5% upmoves to end 5% down. This is a likely signal for the profit taking that many of us bulls have been waiting for. We may still see the change of leadership baton to the large caps which could take the rally further but it is more likely that we will see the Sensex and Nifty consolidate or move downwards. Even if the large caps do make a move, it is not going to be a large one. The bull market needs either a price correction or a sideways consolidation phase in order to create strong support levels for stocks to rally from.

Yesterday, on 16th May, I became aware that I was witnessing history unfolding before my eyes. Over time, people will realize the importance of this day even more than in the heated moment of today as this revolutionary result gets silhouetted against an entire skyline of similar election verdicts. The story is more remarkable than mere statistics.

Statistically, this is the first time that a single party has won a majority in Parliament in 30 years. It is the first time that the erstwhile single largest party has been reduced to double digits.

Hindu Party to National party

The BJP has been known as one of two prominent national parties for some time but its detractors and opponents always smirked at the ‘national’. Though it raised national issues,the ideological baggage of ‘Hindutva’ and the fact that this was the only major difference the common voter saw in this ‘party with a difference’ ensured it was mainly a party with support base and cadre belonging to the Hindi heartland. Its domain was the north and the west of the country with an almost total reliance on alliance partners for any seats elsewhere. This automatically meant it could only come to power only with the aid of other parties and thus made it a weaker power. It was heavily reliant on only a few traditionally strong states on its quest for power. The Congress, on the other hand, due to its legacy had a national appeal and so, always polled at least a minimum number of votes everywhere.

How, incredibly this has changed in this election! For the first time, it has won seats and polled votes everywhere in the country. From 18.8% to 31% it has made a massive jump. It has polled respectable votes in almost every Indian state including the South, North-east, East, far north on its own. From Andaman & Nicobar to Assam and Arunachal Pradesh to Jammu and Kashmir to Tamil Nadu and Andhra Pradesh in the South, the BJP has conquered new lands. For example, it won no seats in Kerala or Meghalaya or Manipur but had significant voteshares in these places. (You can find details on the Election Commission’s website http://eciresults.nic.in/ It is surprisingly fast and informative ). This has historically never been the case. Modi-wave or not, there has been an anti-Congress wave and undoubtedly this is testimony to the fact that the BJP has built up a cadre base in places where it did not exist earlier. Modi’s brilliant exposure of Gujarat’s development over the past decade has paid off and made him a development friendly figure whom people could identify their aspirations with.

I do wish though that Modi had talked more about sadbhavana regarding minorities in this election campaign. This has undermined the moral strength of his victor.

The End of The Gandhi Empire

I believe that if a history textbook were written 200 years later, the period from 1947 onwards would be treated as the Gandhi era(like the Gupta era or the Mughal era), a period when the country was ruled almost uninterruptedly by a single family with only sporadic challenges to its throne. Almost every university, welfare scheme, road, development project has the family name stamped across it. That imperial rule only now is truly threatened. Congress faces the threat of of major attrition to other political formations. Rahul Gandhi faces the risk of being treated by history similarly as the later Mauryas or the later Mughals, successors to the throne whom squandered their natural inheritance to the throne because they were lesser men than their ancestors.

An emphatic comeback by him is only possible through good performance in Congress ruled states like good performance in BJP ruled states helped the BJP romp home. The Congress’ traditional votebank that deserted it this time will come back to it only if something changes in the Congress. Otherwise, even if the the BJP government does terribly, they will still not gain from anti-incumbency. To use a military analogy from the First World war, the trench lines have been broken permanently.

Retreat into Annihilation

By reducing the Congress to 44 seats, less than a half century, BJP may think that it has decimated it. However, just like the BJP has taken so many years to gain support in new areas, the Congress will also take time to totally cede control of areas lost. The battle may be won by the enemy retreating but instead of celebrating, if the victorious army can pursue the retreating columns, it can turn a retreat into a rout and truly obliterate the enemy. The BJP has such an opportunity now. It has been voted into power by a populace truly believing in it. Not all the people who voted for Modi (the swing voters) really know what Modi is for, they only believe that he is better than the UPA government and concentrates on development. They voted for him because he was better than a vacuum. Taking a leaf out of the textbooks of their incumbent governments in M.P, Gujarat and Chhatisgarh, the BJP has to ensure that the people vote for it as first choice next time because they like them and not because they dislike someone else. They will also,very importantly, need to win the faith of the Muslims and other minorities. That is still the only blip in their status as a national party but it is a major blip.

Narendra Modi has an enviable opportunity to deliver on his promises without the typical compromises and arm-twisting that happens in coalition politics. This also means that he has a tall order in front of him. He will have no excuse whatsoever for poor performance.

Challenges to This Beacon of Hope

The entire country is not like Gujarat which would always do reasonably well irrespective of government because of the irrepressible business acumen of the Gujarati. The country needs decisions to be taken fast, policies to be enacted faster, and implementation move from paper to the ground. It needs to increase efficiency and plug loopholes in the system. The utter collapse of manufacturing, power, mining, infrastructure, realty, engineering, capital goods by this disaster of a UPA government led to a systematic destruction of the capital markets, something which we have still not fully recovered for even on the bourses notwithstanding the sharp but narrow index rallies in recent times. (I shall write more about that in another piece. ) The country has to once again become an investment destination.

Perhaps an apt picture of the current state of destruction of the economy

I truly believe that India will do better in the coming decade because there could be nothing worse that the Congress rule of the past 5 years. It is an unprecedented nadir perpetrated by rulers who have shamelessly stripped the country to its bones in its plunder. It is time to clothe the skeleton with flesh once again.

February, a month that has been special for me over the past few years( no, it is not Valentine’s Day). This year, the month marks my return to more serious cycling. Can’t help it, the weather in February is just perfect for cycling. In Surat, this especially holds true as February is the later part of its very short and mild winter and the rest of the year is hot, really hot. My profuse sweating is not much of an issue at this time and that’s just the motivation I needed for me to make a resolution to ride my cycle to work on at least 50% of all days.

An interesting observation is that there is only a difference of one to two minutes between the gross time needed for me to reach office on my cycle(Firefox Roadpro 2200) or my petrol guzzling Vespa. You see, the slow, agonizing bumper to bumper traffic which I have to encounter daily does not need to exist for the cycle. I simply clamber onto the footpath and it is a fast ride sans any traffic.

The ride home is the tougher one. I may or may not have eaten during the day and so the energy for the ride is drawn from reserves. My bag seems so much heavier than in the morning on my arched back and this is the time when the natural riding position of the Roadpro is not very comfortable. Having said that, the aerodynamic position does help maintain good speeds with relatively little pedaling effort during periods of tiredness.

In all, in spite of the arched back riding position, the Roadpro doesn’t tire all that much. The gears work well and all one has to do is to find the gear appropriate for the rhythm. As I have not been cycling all that much lately, I am cycling at an average speed of 30 kmph for the journey as a whole, rarely going above 45 kmph. The Roadpro is no Trek and not for very high speeds anyway, though it is great for cruising in the late 30s or early to mid 40s. Fast on the climbs and nippy on the descents, I would still take the roadie rather than the more comfortable hybrids on the flyovers in this city.

The Tapti licks the Adajan-Hazira Road; the white visible through the trees is the main river body(10 a.m)

It is 5.30 a.m when suddenly the phone rings, waking me. I do not pick up on the first call believing it to be a false call as my name is alphabetically usually at the top of the phone-book. However, the caller is insistent;he calls again. I pick up.

“It is flooding in Surat. If you want to run to Baroda to your relatives, you still can.”

“Are you serious?” I ask, as there have already been two flood scares this year.

” Shop-owners have already started started shifting their stuff elsewhere.I have personally shifted stuff for two houses.” This makes me sit upright on my bed.

This sets my pulse racing. I live in Adajan which is low lying as compared to the rest of the city and the river is just two and a half kilometres from my home. The duplex house I am living in had gone underwater in 2006. If a flood actually came, I would have to shift all my stuff downstairs to the first floor, and it is a lot of stuff I am talking of.

I decide to go on a reconnaissance mission immediately to the Tapti. I wear my raincoat as it is still raining like it did all day yesterday.

The signs of unrest are clear almost immediately. The milk booth has 30 people standing in front of it. Traffic seems unusually high at 6 in the morning. A hundred metres ahead, there is a mini traffic jam with all vehicles queuing up behind each other. Coming closer, I realize, the vehicles have been purposefully lined up in front of the closed petrol pump so that they can tank up as soon as the pump opens in the morning ( it is still dark outside).

The newly built flyover is littered with vehicles left on it in the night by people who got the news early.It has now been closed by the police. I continue onwards to the bridge; I decide to go to the ‘Makai Pul’ which is the lowest bridge among the river bridges of Surat. The sight is overwhelming. Two days ago, the river was a narrow strip in the centre of the bridge and most of the massive river bank was just black mud pockmarked in portions by rain water. Now, there was only water from end to end with the religious sites at the river banks already under water. The river water is moving underneath at a frightening pace, one that brings to mind the Ganga of Haridwar.

The bridge to the other side to of the city is still not affected that much by traffic but jams occur nonetheless as Surti public, true to its kind, is motoring on the ‘wrong side’ on the bridge after witnessing the spectacle of the overflowing river. Making the long U turn is something they simply cannot do( there is something in the Surti air I guess).

An ambulance stands in the water below Sradar Bridge at 0930 hrs

The road parallel to the river I travelled through at 6:30 am is fully flooded at 0930 hrs

A man drags his Activa through the water;nothing unusual for him as this road gets flooded almost every year

I am unable to make the return on the same road on the way back as it has been blocked due to excessive traffic. I thus use the road running parallel to the river. I keep to the right side of the road as water is pouring onto the road on the left. At current speed, this road will be unmotorable within two hours (the pics show this road. it is called the Bapu Nagar Road)

As I return home at 6:45, I find that the kilometres long traffic jam has begun and milk booths have run out supplies. Neighbours ask me whether I have enough stock of food. Fortunately, I have enough food to survive for several weeks.I curse myself for not filling up additional water yesterday from the municipal supply. I set my mobile immediately on the charger.

Local news reports that around 5 lakh cusecs have been released. This is a lot more than the 2.5 lakh cusec releases that had created the earlier scares of this year or the minor flood of 2012 in which water had entered the city through the gutter. This time, the river itself was entering the city.

One line from the Lord of The Rings:Two Towers seems pertinent: “So it begins.”

Update 10 a.m: I do another hour long reconnaissance. The situation is now truly alarming. Water has flooded Hazira Road in Adajan and the parallel road i talked of earlier has indeed gone underwater 3 hours ago. The river has moved inwards by around half a kilometre from its banks in all areas.

Water situation at 9:45 a.m near Morarji Desai garden, Adajan; People can be seen carrying gas cylinders

Vehicles in houses near the river are standing in water. Police have cut off traffic to major bridges leading to the Adajan area of Surat becoming almost cut off. Many provision shops have run out of supplies.

Adajan Hazira Road: Further along the road, the river had completely overflown the road and I had to wade my cycle across to get home

On 2nd August 2013, the BSE Sensex and the Nifty closed at 19164 and 5678 respectively. These levels are similar to average market levels of the past year. The Sensex has maintained a tight range between 18500 and 20500 from September 2012 in a movement that may have been irritating for recent market participants who wished the indices to move upwards. I have been feeling that 19000+ is actually a dizzy level considering the actual fundamentals of the Indian economy ( refer my previous article: Markets at 16000 again’).

However, a closer look at the actual market today has managed to shake me out of this illusion. The market is nowhere near highs. In fact it is very much competing with the intermediate lows of the bear market.

Decoupling: S&P 500 and the Sensex

You may remember the infamous decoupling theory of 2007-08. The theory suggested that the Indian markets were decoupled from international markets because of the fundamental strength of the Indian economy and so would not be affected even if American and European markets burned. The theory thus argued that the Sensex could be bought even at 20000.

As the events of 2008 bore out, nothing could be further from the truth.

However, since the beginning of 2013, we have witnessed part of the premise of the theory coming true; Indian markets have decoupled from US markets. Look at the chart and you will see how the S&P and the Dow have been steadily climbing up a mountain while Indian markets have been taking a saunter along the beach.

The Sensex loses badly, very badly

Mid caps and Small Caps get smaller still

The two year chart of the Small Cap index demonstrates how Midcaps and Small Caps have dropped sharply whenever the Sensex has fallen but by much more and they have also fallen when the Sensex has only been flat.

The bottom has dropped out for small caps

The BSE Small Cap Index has fallen from 13400+ in Jan 2008 to 5178 today. This is only 90% higher than March 2009 lows. The Sensex at 19000 is 140% above March 2009 lows. The BSE 200 is 120% above the lows which seems to be a good performance. However, bear in mind that in times of correction, midcaps and small caps fall much faster and so have much lower bases at historical market lows. Midcaps and small caps are supposed to give greater returns over the long term than large caps. How is it then that we see the Sensex beating their returns so spectacularly?

One chart that shows it all

Illusion behind the Sensex

The level of 19000 too is just an illusion that quickly disappears when we see the stocks that are responsible for keeping it at that level. As it turns out, the only heroes of the index have been in FMCG, IT, Auto, Pharma and HDFC (sorry to place sectors and stocks on the same plane but HDFC and HDFC Bank are a class by themselves). From middle to low levels in terms of weightage in the Sensex, they have risen to the top. Having ITC at max weightage in the Sensex was unthinkable two years ago.

Blood on the Trading Floor

Traditional brick and mortar companies are down to multi year lows across the board. Look at SAIL, BHEL, Hindalco, GAIL, ONGC, RIL, HPCL, Tata Power, Power Grid, NTPC, Tata Steel etc. Look at banking: SBI, Bank of Baroda, Bank of India etc. A behemoth like SBI is struggling at its December 2011 support level of 1600 below which it only has the March 2009 bottom of sub 1000 levels to fall to.

SBI 2 year chart

For midcaps and small caps, pre 2007 levels have returned and many supposedly strong stocks have given up decade long gains. It is almost as if 2004-2007 had never been. The list of stocks is too long and too painful to read out so all I am telling you is to take a look at almost any midcap in the engineering, manufacturing, mining, power, metals, fertilizers, banking, realty, textile, media space. In fact, look at anything other than IT, FMCG and pharma.

The premises of every wealth manager who has talked of investing over the long term for better returns have come to nought.

The FMCG bull run has relied on the strength of India’s consumer based economy but this cannot last forever as consumption in a bear market economy is not the same as consumption in a booming one. The auto sector is already learning this.

The writing on the wall is clear. We are in a horrible, horrible bear market which is better represented by 12000 on the screen, not 19000.

I have spent over 10 months now in Surat and undoubtedly, the diamond city is the most cycle friendly city in India that I have seen thus far. Here, the folks actually have a cycling culture. One would be hard pressed to find as many Hero Hawks and BSA Machs in any other city. Not only do kids cycle to school, a fairly good percentage of them use road bikes instead of the ubiquitous MTBS/ATBs (mountain/all terrain bikes) that go for popular cycles in this country. The city has a cycling group and several retailers of high quality cycles including imported ones. The presence of such fellow cyclists indubitably makes for a better riding experience.

My Firefox Road Pro 2200

It is not as if Surat has more sports lovers than other places. The phenomenon is more likely due to the awfully good roads. The sheer quality and width of the roads is so inspirational that within five days of landing here, I went ahead and bought a Firefox Road Pro 2200, complete with a headlight, blinkers and a speedometer confident that if the machine was built for any Indian city, it was built for Surat. The city road infrastructure is growing at such breakneck speed that in just 10 months of my being here, one flyover and one bridge have been constructed from scratch and several are nearing completion. The roads are mostly pothole free and extremely wide so that road space is not an issue.

The Sardar bridge sits over the Tapti river:one of five bridges In Surat (one is under construction)

Traffic Sense (or the absence of it)

In other cities, people work in contravention of traffic rules; they take pleasure in breaking them and getting away with it. Surat isn’t one of those cities. It is a city in which people simply have not heard of traffic rules. They may know the very obvious ones like, stop when a policeman blows a whistle or, reverse your motorcycle when you see challan-slip wielding cops and you obviously do not have a helmet on, but they have no idea about concepts like right of road or the free left turn or wrong and right sides of the road. They simply do not know. So I have seen sights like a huge bus coming down the wrong side of a main road at 50 kmph at 10 o clock in the night or motorcycles standing at right angles to traffic direction at red lights or vehicles stopping in the middle of the road at main traffic circles and consulting for directions.

Cycle’s Mileage

Moving back to cycling, recently, I managed to measure something you folks might have never thought was measurable. It was an unintended consequence of my cycling expedition to purchase some merchandise, I ended up calculating the mileage of my cycle! For 25 km, I had to tank up twice on Mousambi juice drinking three glasses of 300 ml each. At Rs 20 a glass it is about Rs. 67 per litre, same price as petrol! 25 km per litre of Mousambi* does not seem good as compared to 55 kmpl on a motorcycle guzzling on petrol. Next week, I am gonna experiment with a different juice.

*Disclaimer: Performance is contingent on the user, traffic, temperature, humidity and sugar content of the juice.